A Personal Guarantee is a legal commitment by an individual to repay a business debt if the business defaults, exposing their personal assets and credit to risk.

Primary Implication

BE EXTREMELY CAREFUL when considering debt financing for any asset purchase where the lender wants a personal guarantee.

Agreeing to provide a personal guarantee means that the individual assumes personal responsibility for the balance if the business cannot repay the debt.  Should this happen, the creditor will go after personal assets such as your home if your business fails to repay the loan.

If you are not 100% sure of the profits to earn from this highly risky payment guarantee, you think hard about making the asset purchase until your business is stable enough to qualify for financing without you guaranteeing the debt.

Overview

A Personal Guarantee is an individual’s legal promise to repay credit issued to a business for which they own.  Providing a personal guarantee means that if the business becomes unable to repay the debt, the individual assumes personal responsibility for the balance.

Personal Guarantees are unsecured written promises from a business owner guaranteeing payment on an equipment lease or loan in the event the business does not pay.  Failure to repay a personally guaranteed debt means that creditors will go after you if your business fails to repay the loan.  For example, The Small Business Administration requires that all loans it guarantees must also be personally guaranteed by anyone with a 20 percent or greater ownership stake.  Because of the SBA, other lenders have followed suit to protect their right to be repaid the money they have loaned you.

Defaulting on borrowed money, you have signed a personal guarantee that will not only impact your personal credit score for up to 10 years.  Any collateral you put up for the loan will be forefitted.